There fears that traders would abandon Italy’s bond auction, scheduled just a day after the country was declared “ungovernable” after its inconclusive election results.

However, Rome sold €4bn of 10 year bonds, albeit at a yield of 4.83pc - a jump from 4.17pc just a month ago. A further €2.5bn of debt maturing in five years was raised at a yield of 3.59pc compared with 2.94pc.

Despite the higher costs, Italy was deemed to have passed a big test of market confidence.

The stockmarket in Milan, which had plunged almost 5pc on Monday, recovered marginally and closed up 1.77pc on the day. European markets followed suit: the French CAC rose 1.92pc, Spain’s Ibex climbed 1.95pc and the Geman DAX was up 1.04pc. In London, the FTSE100 rose 0.88pc. On the bondmarkets, the yields on most European benchmark debt remained stable too. The euro pared losses against the dollar.

Yet traders remained wary. Rather than making progress towards the establishment of a stable government, Italy’s politician descended from deadlock to dispute.

Beppe Grillo, whose Five Star protest party secured 25pc of the vote in Italy, strongly rejected calls by Pier Luigi Bersani, leader of the Democratic Party, to back a coalition. The popular comedian dismissed Mr Bersani as a “political stalker” who had been “pestering the Five Star movement for days with indecent proposals.”

On his blog Mr Grillo listed the insults Mr Bersani had levied at Five Star during the campaign, for instance: “Lenin is not nearly as bad as Grillo.” Mr Grillo declared that his anti-austerity party would “support in parliament only the laws that mirror its programme - whoever proposes them.”

Meanwhile Italy’s President Napolitano cancelled a dinner with Germany’s prospective chancellor Peer Steinbrueck after he said that “two clowns” had won the election. He was apparently referring to Mr Grillo and Silvio Berlusconi, the former premier.

The Italian elections represented an extraordinary rejection of Brussels’ plans for fiscal discipline in the eurozone. They also poured doubt on the European Central Bank’s ability to help since its Outright Monetary Transaction programme requries a commitment to austerity. But with €420bn of debt to raise this year, Italy can ill-afford high borrowing costs.

Mario Draghi, president of the ECB, warned that there were limits to the support the central bank could offer to any stricken member state. In a speech in Munich last night, Mr Draghi said: “It is important to stress that the ECB’s mandate only extends so far. There are clear limits to what monetary policy can and should aim to achieve. We cannot repair unsound budgets. We cannot clean up struggling banks. We cannot solve deep-rooted problems in the structure of Europe’s economies.”

Ironically, fresh data showed business and consumer confidence in the eurozone improved during February. The European Commission’s Economic Sentiment Indicator rose 1.6 points to 91.1 with rises in Germany, Spain, France and Italy driven by increased in industry and services. For Britain, the indicator showed a drop of 0.5 points.